Opec agrees to limit production after two-year slump in global oil prices

On Wednesday, the Organization of the Petroleum Exporting Countries agreed to limit oil production as part of an effort to boost prices following a two year slump. The deal will cut production by about 700,000 barrels per day, limiting the output to between 32.5 and 33 million barrels per day. With current production at 33.24 million barrels, it would be a fairly small reduction. Nonetheless, Brent Crude prices rose to $49.64 on Thursday, with almost an 8 percent gain since the agreement was announced on Wednesday.

Opec will meet again on November 30th, in Vienna, to work out the details of production targets for its twelve members. With Opec’s membership sharply divided about output levels, this step may prove to be a challenge. Still recovering from US sanctions lifted in January, Iran has been unwilling to reduce production, which still has not returned to peak capacity. Similarly, Libya and Nigeria are hoping to increase oil production after years of their own internal strife. In agreeing to the deal, Saudi Arabia is reversing its existing policy, which had been to maintain oil output, so that low oil prices would put US shale oil producers out of business. They have been forced to rethink this strategy as low oil prices have forced cuts in public spending.

Dougie Youngson, who is an analyst at the stockbroker Finncap, said “There is a lot of work that has to be done and the agreement could fall apart quite quickly. US shale is not going to go away and arguably Opec has made things worse because the companies that have survived are better placed for when the oil price goes up.”

He says that while Saudi Arabia has accepted that their strategy has failed, they want to avoid being the sole producer to cut prices while other producers continue at previous levels.

With the lower oil prices harming the economies of Opec member states, resistance from countries like Saudi Arabia and Iran has created a division in the organization.

Russia has also been depending on oil production to support its economy during a downturn. Russian representatives have been invited to the Opec meeting in November.

The deal will mark the first time Opec has agreed to production limits since 2008.